Taiwan vs. U.S. Rental Income Taxation – Part 2 : Want to Be an Overseas Landlord? Learn How to Report Your Overseas Income Tax

U.S. Real Estate Investments and Rental Income Taxation 

U.S. real estate has long been a favored investment option for many investors as part of their asset allocation strategy. Since non-U.S. citizens are allowed to purchase properties in the U.S., many high-net-worth individuals from Taiwan also own real estate there. If they choose to rent out their properties and generate overseas rental income, what are the tax implications? 

Reporting to Taiwan's Individual Income Tax 

Let’s start with Taiwan’s individual income tax. In Taiwan, rental income from U.S. properties is considered foreign income and must be included in the individual's basic income when filing taxes. According to Taiwan's Income Tax Act, foreign income is added to the individual’s basic income amount, which is then used to calculate the alternative minimum tax (AMT). However, there is an annual foreign income exemption of NTD 1 million. This means that if the total overseas rental income is below NTD 1 million, it does not need to be included in the basic income calculation. 

Reporting to U.S. IRS 

On the other hand, under U.S. tax laws, any income derived from the U.S. is subject to U.S. income tax. For Taiwanese investors without U.S. citizenship, figuring out how to pay U.S. taxes becomes a key issue. To address this, the U.S. Internal Revenue Service (IRS) has established a withholding tax system for foreign landlords. 

For Taiwanese landlords, when they receive rental income from U.S. properties, the tenant or property manager is required to withhold 30% of the gross rental income and remit it directly to the IRS. The remaining amount is what the Taiwanese landlord actually receives. 

Additionally, under this withholding tax system, Taiwanese landlords are not allowed to deduct rental-related expenses from their taxable income. Generally, U.S. landlords can deduct necessary rental expenses (such as property taxes, insurance, and maintenance costs) when filing their tax returns. However, Taiwanese landlords using the withholding tax system must pay taxes based on the gross rental income, without any deductions. In this case, Taiwanese landlords will receive Form 1042-S from the payer each year, which details the rental income and the tax amount withheld by the tenant or property manager. Typically, Taiwanese landlords receiving Form 1042-S do not need to file a tax return with the IRS. 

Opting for Taxed as Ordinary Income Instead of Withholding Tax 

Alternatively, Taiwanese landlords can elect to report U.S. rental income as ordinary income instead of using the 30% withholding tax system. Under this method, there are specific rules and benefits applied: 

• The tenant or property manager does not withhold 30% of rental income. 

• The landlord must file a U.S. tax return (Form 1040-NR) annually, by April 15 or the extended filing deadline. 

• Rental expenses (such as mortgage interest, property taxes, depreciation, repairs, utilities, and insurance) can be deducted from rental income. 

• The applicable tax rate follows the U.S. individual income tax brackets, ranging from 10% to 37%, depending on total taxable income. 

Withholding Tax vs. Ordinary Income Taxation – Which Is Better? 

The withholding tax method is beneficial for landlords with high rental income, as they are taxed at a flat 30% rate regardless of income level. However, for landlords with lower rental income, using the withholding tax system can be costly, since they cannot claim any deductions. In such cases, opting for ordinary income taxation may be the better choice. 

How Can Taiwanese Landlords Switch to Ordinary Income Taxation? 

According to U.S. tax laws, taxpayers must file Form 1040-NR in the year they switch to ordinary income taxation. Additionally, they must attach a statement declaring their election under the relevant tax code. This statement must include: 

• Details of all rental properties in the U.S. 

• Rental income and expenses 

• Property ownership period 

Once a taxpayer elects this method, all future U.S. rental income will be taxed as ordinary income, unless they later withdraw the election by notifying the IRS. 

Criteria	Withholding Tax	Ordinary Income Taxation
Tax Rate	30% (on gross income)	Based on U.S. tax brackets (10%-37%)
Deductions	None	- Mortgage interest- Property taxes- Travel expenses- Depreciation- Maintenance costs- Utilities- Insurance
Tax Payment	Tenant/agent withholds 30% and remits to IRS	No pre-withholding
U.S. Tax Filing	Not required	Required (Form 1040-NR) by April 15 or extended deadline

When filing Form 1040-NR, the taxpayer must also include Schedule E to detail income, deductible expenses, and property location. Due to the complexity of U.S. tax laws, it is recommended to consult a professional accountant for proper filing and compliance.